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Korn/Ferry For Hire

The placement firm has plenty of cash to put to work.

Executive placement firm Korn/Ferry(NYSE:KFY) just reported another quarter of solid revenue and earnings growth. And while now may not be the best time to be jumping into the shares, the company has very compelling cash flow-generating capabilities.

For the first quarter of fiscal 2007, Korn/Ferry reported that revenue jumped 25% to $153 million, while diluted earnings grew nearly 15% year over year. Not surprisingly, the company attributed its strong results to global economic growth and organizations that are actively recruiting "human capital."

Additionally, the company generates impressive free cash flow, or FCF. For the most recent fiscal year, FCF exceeded reported net income, coming in at approximately $69 million, or $1.46 per diluted share. That represents a price-to-FCF-per-share ratio of less than 14, and a FCF yield (the inverse of P/FCF) of more than 7%. That's a favorable comparison to the benchmark 10-year Treasury Note yield, which was recently 4.8%.

Keep in mind that Korn/Ferry is subject to the business cycle and related employment trends. After the technology and stock-market bubble burst in 2000, the shares bottomed out, along with the market, by 2002. But the stock has more than doubled since, to a current $20.27. I've noticed that cash flow generation holds up better than reported net income during economic downturns, but that doesn't mean that investors won't bid down the stock, or that business trends won't prove challenging.

Additionally, Korn/Ferry and competitor Heidrick & Struggles(NASDAQ:HSII) cater to the executive-placement space of the recruiting market. This area is generally thought to hold up better during economic downturns, especially if manufacturing or other blue-collar positions are affected. Competitors such as Manpower(NYSE:MAN), Adecco(NYSE:ADO), Kforce(NASDAQ:KFRC), private firm Russell Reynolds, and Robert Half(NYSE:RHI) are more exposed to the permanent-hire markets for middle management, as well as the temporary- or contract-staffing areas.

And while the temp-hire market is clearly more susceptible to fluctuations in the business cycle, when companies look to quickly hire or eliminate employees to adjust to the demand for their products and services, reviewing the above stock charts over the past six years demonstrates that employee-placement firms tend to move in tandem. Manpower has performed the best during the economic expansion that started in 2002, but all stocks in the industry have performed well.

As a contrarian, I'd recommend picking up these shares during the next period of economic malaise. This is easier said than done, since timing a trough is almost impossible. However, the purchase of an economically sensitive stock during rocky times can lead to gains once the clouds begin to clear.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to e-mail Ryan with feedback or to further discuss any companies mentioned. The Fool has an ironclad disclosure policy.